Construction contractors and utility companies sometimes need to gain access to areas beneath a road. This usually requires the removal and subsequent replacement of a portion of the road surface – a “paving cut.”

The taxability of persons making paving cuts depends upon the nature of the contract under which the paving cuts are made, and also on who owns the road.

  • State-owned road: Construction and repair, including paving cuts, of a state-owned road is always a retail sale. The person performing such work is subject to retailing B&O tax, and must collect retail sales tax from the customer.
  • Federal, city or county-owned road: If the paving cut is made in connection with a contract to build or repair a city, county, or federal road, such as a contract to install or repair storm drains, then the public road construction B&O tax applies. The contractor owes sales or use tax on the materials incorporated in the roadway.
  • If the paving cut is made as an inseparable part of a contract that is itself a retail sale, then the entire charge is taxable as a retail sale. For example, a paving cut made as part of a contract to install or repair underground utilities under a private, state, city, or county road is a retail sale.
  • A contract to install or repair underground utilities under a federal road, including any necessary paving cuts, is subject to the government contracting B&O tax. The contractor owes sales or use tax on the materials incorporated into the roadway.